Standing Committee A

[Sir John Butterfill in the Chair]

Finance Bill

(except clauses 4, 5, 20, 28, 57 to 77, 86, 111 and 282 to 289, and schedules 1, 3, 11, 12, 21 and 37 to 39) - Clause 89 - Venture capital trusts

Question proposed [this day], That the clause stand part of the Bill. 
 Question again proposed.

John Healey: I welcome you to the Chair, Sir John.
 I was making the point that the changes proposed in the clause have been warmly welcomed by the venture capital industry. I had offered one quote as confirmation of that and will offer another. Senior consultants at Ernst & Young reckon: 
''These changes will provide a considerable boost for cash-starved firms looking for investment capital.''
 I turn to a couple of specific points raised by my hon. Friend the Member for Wolverhampton, South-West (Rob Marris) and the remaining point of principle raised by the hon. Member for Arundel and South Downs (Mr. Flight). 
 On the word ''issued'' as used in the clause, there is a difference between shares that are allotted and those that are issued, as my hon. Friend loyally pointed out. The provisions for venture capital relief are determined by reference to the date on which shares are issued, not the date on which they are allotted, so it is entirely appropriate that the changes made by schedule 19 take effect according to the date of issue. 
 I turn to the general point of principle that was troubling the hon. Member for Arundel and South Downs, who said that the changes may look appealing but, at first sight, particularly with the interplay between capital gains tax deferral abolition and the increase in income tax relief, the venture capital industry is concerned that it will lose out in the long term. I understand that the industry must plan ahead and that the valuable tax incentives offered to it are an important part of that planning. More than half the responses to the consultation on the changes were in favour of replacing capital gains tax incentives with enhanced income tax relief, with approximately one third taking a contrary view. 
 The most common benefit cited for enhanced income tax relief was that that would lead to a less volatile form of funding than CGT-based incentives because of the dependence of CGT accruals on cyclically affected asset markets and, therefore, the capital gains that investors would have reason to look to shelter in VCTs. The other benefit often cited was that income tax relief was likely to be simpler and 
 more attractive to a younger and broader range of investors. 
 The challenge facing us is that industry professionals have told us, and published data on investment via VCTs demonstrate, that in recent years levels of VCT investment in small companies have fallen. Our analysis, plus the views of industry, show CGT deferral relief to be a factor in that. Investors cannot make use of it unless they have capital gains that they want to shelter. On the day after the Budget in March, the Financial Times commented that 
''VCTs are often used as a shelter for capital gains, but this has been their undoing over the past three years.''
 We sought to deliver in the clause a kick-start to revive the industry, and we have done that by shifting the tax incentive towards income tax relief. We have limited the relief to two years because it is generous, and no member of the Committee would dispute that.

Rob Marris: Referring to my hon. Friend's earlier answer to my question about ''issue'' versus ''allotment'', what is to stop a venture capital company issuing shares during that two-year window but not allotting them until much later, thereby getting around the window that the Economic Secretary seeks to impose?

John Healey: Generally, as my hon. Friend is probably aware, allotting takes place before issuing, so the sequence is usually the other way round. Because the Bill specifies the date of issue, that is the relevant date at which the provisions apply.
 Decisions on what will happen in two years will be based on evidence of the effect of the changes that we seek to make in the Bill, on what we learn from our continuing discussions with the venture capital industry and, importantly, on the direction that the industry itself takes. It is impossible to say with any certainty at this point what we should do in two years. The industry is flexible: it is continually looking for new ways to make its offering attractive. It is only right, therefore, that the Government should retain some of the same flexibility within the clear and constant objective of improving access to capital for small, growing companies. 
 The approach that we adopt in the Bill appears to be right in the eyes of a number of commentators. It attempts to balance the objectives and concerns that I have explained to the Committee. I end my remarks with a comment from Mark Fox of the British Venture Capital Association, who said after the Budget: 
''The reforms will go a long way to helping VCTs invest in smaller and more entrepreneurial businesses''.
 On that basis, I commend the clause to the Committee.

Howard Flight: I want to respond on two issues, to reinforce my point. The very genuine concern of what I would call the heavy part of the early stage venture capital industry is that although the changed incentive—the 40 per cent. income tax relief—has obvious attractions to people, it is virtually the same as the old business expansion scheme incentive, which led to the construction of schemes that were of a short-term, tax shelter nature. Serious long-term early stage venture capital investment is tricky. It is not
 surprising that, in the short term, an industry tends to welcome anything that might deliver more money to manage. That should be the case, because otherwise no one would have any capital gains left to defer.
 However, there is a serious risk that the structuring of venture capital funds will be driven down a route that is bad news in all sorts of ways. That route will discredit such funds and it will not, above all, channel money to early stage venture capital, which is where the famous gap tends to exist. The Economic Secretary should not be entirely persuaded by the BVCA or one or two other bodies. There is a serious danger. I am aware from my own knowledge of the industry that, quite understandably, people are now looking at structuring tax shelter vehicles out of the incentive. 
 The second point, which surprised me, is that I had understood from other discussions that the new regime was an experiment on the part of the Government and that, as I said earlier, they might intend to revert to the old regime. However, the Economic Secretary made it clear that, as far as this Government are concerned, the ending of CGT deferral is permanent, and its revival is not under consideration. 
 The Economic Secretary made it clear that the very generous 40 per cent. is for two years only. I have to make the obvious point that if we end up with a 20 per cent. income tax incentive, that will be the death of venture capital trusts and the move will amount to a rather subtle phasing-out of the whole VCT incentive. I am afraid that there is no other interpretation of what the Economic Secretary said at the beginning of his speech. I do not think that the industry understands that that is the situation. It thinks either that the 40 per cent. is likely to be there for ever, or that we will revert to the old regime if markets go up and people have got lots of capital gains. However, if this Government were, unfortunately, still in power, we would end up with just a 20 per cent. income tax incentive, and the message would go out loud and clear to the industry: ''Forget VCTs. They're being phased out, mate.''

John Healey: I accept the hon. Gentleman's point about genuine concerns and his caution, which is based on his experience, especially on the question of long-term incentives to hold investments. There is a genuine debate about the most effective way to put in place the right incentives to allow the flow of funds to continue through VCTs. However, let me be clear on one point. The clause is not the first part of some sort of phasing-out of support for VCTs. It is not in any way a slackening of our commitment and support for the role that they play.
 The challenge that we face, which I have tried to explain, is to kick-start the low levels of funding that have been routed through VCTs over the last two or three years. There is a concern about the long-term effect of CGT deferral relief amplifying the structural peaks and troughs that we have experienced with VCT funding. I have tried to explain very clearly that we shall introduce the new income tax relief at 40 per cent. for two years. Before the end of that period, we shall have to make decisions about what we will do beyond 
 that. Those decisions will be made in light of the impact that the new package of incentives appears to be having on the industry and on levels of investment. They will also be informed by the opinions that we receive from the industry and by developments during the next couple of years in what is a very flexible and fast-moving industry.

Norman Lamb: With regard to the assessment, if the policy is seen to be working and introducing new money into VCTs in two years' time, is the Minister saying that that will be a significant factor in encouraging the Government to continue the higher rate of relief?

John Healey: It is a shame that the hon. Gentleman was not here for the start of the debate. Self-evidently, our major objective, which is shared by the Committee, is to ensure the highest possible level of investment for small, generally risky, companies being routed through VCTs as one of the streams of potential funding. The purpose of our proposals is to try to improve on the investment of the last couple of years, which will be a decisive factor and a continuing objective in any decisions that we make. I made it clear before the break—which was the point of my gentle admonishment of the hon. Gentleman—that we would make decisions on what should happen before the end of the two years, not afterwards, as the hon. Gentleman suggested.
 Question put and agreed to. 
 Clause 89 ordered to stand part of the Bill.

Schedule 19 - Venture capital trusts

Howard Flight: I beg to move amendment No. 27, in
schedule 19, page 369, line 23, leave out from beginning to end of line 7 on page 370.

John Butterfill: With this it will be convenient to discuss the following amendments:
 No. 28, in 
schedule 19, page 374, line 23, at end insert— 
 '17 (1) Schedule 33 to the Finance Act 2002 (Venture Capital Trusts) is amended as follows. 
 (2) After paragraph 7 insert— 
 ''7A Without prejudice to the generality of the foregoing of this Part of this Schedule, a VCT-in-liquidation or a VCT-in-liquidation that has been wound up shall be deemed to remain a VCT (that is to say, a company whose shares are deemed to be shares whose approval as a venture capital trust is not withdrawn) for the purposes of Schedule 5C of the Taxation of Chargeable Gains Act 1992''.'.
 No. 29, in 
schedule 19, page 374, line 23, at end insert— 
 '17{**th**}(1) Section 151A of the Taxation of Chargeable Gains Act 1992 (Venture Capital Trusts: Reliefs) is amended as follows. 
 (2) At the end of sub-section (1) of that section, insert— 
 ''save that a loss arising on the disposal of such ordinary shares shall be an allowable loss in the case where and to the extent that a claim was previously made under paragraph (2) of Schedule 5C to this Act and the expenditure on such ordinary shares was treated for the purposes of that schedule as qualifying expenditure.''.'.

Howard Flight: I should welcome you to the chair this afternoon, Sir John, and I apologise for not doing so earlier.
 All three amendments are probing. The first is designed to tease out whether the Government statement means the deferment of CGT relief is to be abolished for ever. I repeat the point that I had understood in discussion with others that in nearly two years' time the regime would be up for grabs—all things being equal—and a decision could be made to revert to the present regime. What the Economic Secretary has just said confirmed that the Government are not thinking of leaving that option open for the future. That is a mistake; very different circumstances may prevail in future. 
 When I was going through amendments Nos. 28 and 29 last night, I thought that they were not very good. The tax position on venture capital projects that go bust, be they VCTs or enterprise investment schemes, is complex, and one forgets what the rules are. 
 Circumstances have arisen in which venture capital investments that have had the income tax shelter and that of CGT deferral go bust and, at best, the investor is left to refund the 20 per cent. income tax allowance. The previous Conservative Government introduced the measure, and although its logic is clear, the other side of the coin is that people would have been better off never having risked their money in the first place, paying their capital gains tax and leaving the money in the bank. Well, fair dice—take a risk and hard luck if it does not work—but that has seriously damaged the perceived attractions of venture capital investment. Money has dried up not just because people have had less capital gains tax to defer, but because they have had the unpleasant experience of finding that a lot of their investment has gone bust and that they have a tax refund bill at the end. 
 The rules are incredibly complex. From my own experience, finding out when something has gone bust and precisely what the tax rules are has burned up hours. I corresponded with Sir Nick Montagu about that and he admitted the problem but said that it was too difficult to address. It is a very complex and tedious aspect of taxation. Ultimately when businesses go bust the tax situation is relatively harsh. 
 I stray a little in talking about EIS investments, which are a little more specific and cut and dried than VCT investments. It is unusual for VCTs to go bust because of their spread of investments, but in market value terms many have done extremely badly and stand at one third of their start-off value. 
 We are also moving to a time of possible enforced realisations. Although the five-year rule has been changed to three years for income tax, it has happened only latterly. For the great majority of venture capital money, if the loss crystallises in five years, the income tax charge must be fully refunded. 
 The rules about how one can take capital losses were complex. In some cases, it was a 100 per cent. loss and one could take it against income if one had enough to take; in others, and I have forgotten the 
 technicalities, one could obtain a capital gains tax offset. 
 The point of the amendments is to highlight the fact that when things go completely bust or pretty badly for historic venture capital and VCT investment, the tax situation is complex and harsh. That is one reason why people are jaundiced by it; if nothing else they did not expect the situation to arise. I freely admit that the previous Conservative Government introduced the regime, but as with the changes today no one thinks about the future. People's knowledge of their tax position and its tax consequences is unsatisfactory. 
 The amendments are rather crude and do not work particularly well because they would either add no advantage or create too generous an advantage. However, they highlight a problem that underpins one reason why people are less keen on venture capital trusts. The Economic Secretary will say, ''We are not interested in the past, so hard luck on those poor devils, but changing to an income tax regime means a new regime that will have its own attractions.'' However, it has its own potential weaknesses as well. Does the Economic Secretary have any thoughts about addressing the complexities of the tax situation and its relative harshness for venture capital investments that go back for years? Do the Government have any proposals to address those problems?

John Healey: The hon. Gentleman describes his amendments as probing. I hope that he feels that, on the first of his concerns, which is raised in amendment No. 27, he probed sufficiently during the debate on clause 89. I simply say to him that venture capital is a dynamic industry; it constantly strives to alter its attractiveness to investors. We want the flexibility—as a Government, I think it right that we claim it—to ensure that we can respond accordingly and play our part in ensuring that VCTs remain attractive. We will consider how to do that during the next two years.
 Amendment No. 27 seeks to reverse the abolition of the CGT deferral relief for investors. I hope that I have explained why that would be a backward step and given the hon. Gentleman the information—if not the reassurance—for which he was probing.

Howard Flight: Thinking back, I heard the Economic Secretary say that there would be no consideration of a changed regime that might bring back CGT deferral. He then talked, slightly more generally, about the situation being open. I want to know whether the Government's position is that there is a clear understanding, as per the original announcement, that this is the end of CGT deferral.

John Healey: If the hon. Gentleman consults the Official Report for the Committee, he will see that I did not, at any point, say that. I explained why we have taken the view that CGT deferral relief exacerbates some of the cyclical problems of VCT fund flows. He will have heard me say that the majority of respondents to our consultation were of a similar view and wanted reforms such as those in clause 89 and this schedule. At no time will he have heard me say that anything is ruled out as we take stock during the next two years and consider what we should put in place to try to maintain the attractiveness, and
 maximise the volume, of investment funds through VCTs.
 On amendment No. 28, I remember the proposal that the hon. Gentleman made during the proceedings on the Finance Bill in 2000. I also remember the discussion that we had in Committee during the scrutiny of the Finance Bill in 2002 when, as a Government, we provided for VCTs to merge or, as relevant here, to wind up in an orderly fashion without risking the loss of VCT tax reliefs, about which the hon. Gentleman was consistently concerned. 
 It may be more appropriate to discuss this point in the debate on the next group of amendments, but I just say that, although the hon. Gentleman talks of VCTs going bust, I am not aware of any doing so, and nor are my advisors. If the amendment's purpose, apart from probing, is, as I think, to ensure that a VCT in liquidation—what, in draft regulations, would be termed a VCT that is winding up—would be treated as continuing as a VCT so that CGT deferral relief was not revived solely on account of the winding up, I can reassure the hon. Gentleman that the provisions in schedule 33 of the Finance Act 2002 are already adequate.

Howard Flight: I thank the Economic Secretary for that response. As I said, the amendments were tabled to air some issues. I shall just comment on his last point. What I was trying to get at was slightly wider. In situations in which a gross investment in a VCT of £100 ends up being worth £10 or £20, which is not at all uncommon, or—this is really more relevant to EIS investments—in which individual venture capital investments go bust, as a large proportion do, investors generally find themselves in a rather more unpleasant situation tax-wise than they had anticipated. The CGT deferral comes back into play, and, if the period is less than five years, the income tax bill is restored. There are certain circumstances in which capital losses can be offset against income and others—I have forgotten how they work—in which one can actually claim a capital loss, but there is generally pretty bad news tax-wise when venture capital investments fail.
 Both amendments were designed to raise the point that situations of total failure, which I grant are more suitable for EISs than VCTs, or of substantial loss have been a significant turn-off to VCT investment. There is probably no pragmatic argument for doing anything about that—there is a case for looking to the future—but the Revenue might look at the issue in more detail. 
 Finally, something that is not in the amendments at all but is relevant is the administration, which is a complete nightmare. It is difficult to define when something has gone bust, and the hassle for people filing tax returns when venture capital investments fail is formidable. That also is a big deterrent. What looks nice up front turns out to be a nightmare when it goes sour. I was simply asking whether the Government were at least considering the matter. I beg to ask leave to withdraw the amendment. 
 Amendment, by leave, withdrawn.

Howard Flight: I beg to move amendment No. 32, in
schedule 19, page 374, line 23, at end add— 
 '17 (1) Schedule 33 to the Finance Act 2002 (Venture Capital Trusts) is amended as follows. 
 (2) After ''Obtained'' in sub-paragraph (2) of paragraph 8 (Power to facilitate mergers of VCTs) insert ''but not subject to any condition that would prevent a merger of two or more companies in the case where one company makes an unsolicited offer for the shares of one or more other companies (or otherwise makes an offer for such shares that has not been agreed by such other companies).''.'.

John Butterfill: With this it will be convenient to discuss amendment No. 33, in
schedule 19, page 374, line 23, at end add— 
 '17 (1) Schedule 33 to the Finance Act 2002 (Venture Capital Trusts) is amended as follows. 
 (2) In paragraph 10— 
 (i) subparagraph (1)(b)(i), after ''company'', insert ''such that company A comes to possess voting power in excess of 50 per cent. of the shares in the other merging company''. 
 (ii) in subparagraph (2)(b)(i), after ''company'', insert ''such that company B comes to possess voting power in excess of 50 per cent. of the shares of each of the merging companies''.'.

Howard Flight: The amendments are not probing amendments but endeavour to be explicit. The Economic Secretary was kind enough to refer to my proposal in 2000 and to the Finance Act 2002. I had raised the need for mechanisms to sort out venture capital trusts. Some are done well, some are done badly, takeovers are required and so on. Rationalisation was, in essence, blocked by the rules governing VCT investment because if trusts did not invest in a security that met the definitions, they disqualified themselves. The point was taken by all sides and provisions were introduced in the 2002 Act to implement it. However, nothing has happened yet. There have been several consultations, but we still do not have secondary legislation to implement the principles in the 2002 Act. First, on a practical point, when will that happen? We are two years later on.
 Secondly, the amendments address two practical issues, and from my knowledge of where the Revenue has got to I do not understand the problem. The Revenue has insisted within the regulations that mergers should be agreed, but that will never be achieved unless there are common fund managers. The fund manager of a VCT will probably resist it because they lose the business of running it and the number of voters in such situations is never an overwhelming majority. It would be entirely healthy to permit hostile bids, as they would shake out the market. In producing the regulations, is the Revenue still insisting on agreed mergers? If so, that is inappropriate. 
 The Revenue proposes that where there is a share-for-share offer by one VCT for another, more than 90 per cent. of shareholders should be required to accept it in order for a merger to qualify for VCT relief. Given the average size of VCT investments, which round up to £25,000, if that, the chances of getting 90 per cent. of shareholders to vote at an AGM are remote to say the least. That is why the amendment 
 suggests a 50 per cent. target, but even that will not be easily achieved. 
 We are two years down the line from the measure in the 2002 Act. There have been nine drafts of the regulations and still nothing has happened. I do not know whether I have got this right, but if the two issues that I have mentioned are the sticking points, I cannot see why the latter cannot be resolved by a 50 per cent. vote and the former by removing any requirement for agreed mergers.

Rob Marris: I understand what the hon. Gentleman means when he talks about 50 per cent. of the voting power, but he also referred to 90 per cent., which in the Bill is
''90 per cent. of the issued share capital . . . and not less than 90 per cent. of the voting power''.
 Why in amendment No. 33 has he not referred his 50 per cent. to the issued share capital as well as to the voting power?

Howard Flight: I thank the learned hon. Gentleman for his comment. The answer is that it should be there, for which I apologise.

John Healey: The hon. Gentleman made three points: he contested the idea that mergers must be agreed; he argued that in this field hostile takeovers are a good thing; and he stated that 90 per cent. of the votes is too high a merger-acceptance figure. I hope that I can be helpful as I explain our position and the approach that we plan to adopt.
 As the hon. Gentleman says, amendments Nos. 32 and 33 attempt to change the primary legislation that introduces regulations allowing VCTs to merge with each other or wind up in an orderly fashion without jeopardising the generous VCT tax relief. Far from nothing happening, the next draft—he may be right that it is the 10th draft—of the regulations that provide for the merger and takeover of VCTs is imminent. The Inland Revenue and the VCT industry have been working very closely and hard on the issue. It has proved to be a highly complex area, which has been quite resource intensive for both sides, not least in terms of the paper that has been used for the drafts. We aim to have the next draft of the regulations available about the end of next month. 
 The hon. Gentleman will be pleased to have confirmation that amendment No. 32, which aims to prevent the VCT merger regulations from imposing conditions that prevent the VCT tax reliefs from being available in circumstances where there is a hostile takeover by one VCT of another, mirrors the point put to us by the industry following the last exposure of the draft regulations. Having considered his arguments and suggestions carefully, we agree and accept that the amendment has merit, and the next draft of the regulations will reflect that accordingly. 
 Similarly, amendment No. 33 reflects a point that has been made to us by the industry following the exposure of the previous draft of the regulations, which rather underlines the value of the process of drafting, exposing and re-drafting regulations in order to get them as right as we can. The draft stipulated that the acceptance figure needed for a VCT merger to fall within the regulations would be set at 90 per cent. 
 of the vote. We recognise and accept that to achieve 90 per cent. acceptance before a merger can proceed might create practical difficulties. I assure the hon. Gentleman that the next draft of the regulations will deal with that point and set the level of acceptance for proposed mergers at 50 per cent., as he proposes in amendment No. 33. With those assurances, I hope that he will consider withdrawing the amendment.

Howard Flight: I am delighted to hear those confirmations from the Economic Secretary. Can I just ask him please to get it done by the time of the next election, which as he well knows may well be in the autumn? Two years is enough, and the industry needs a lot of sorting out as soon as possible. On the basis of his remarks, I beg to ask leave to withdraw the amendment.
 Amendment, by leave, withdrawn. 
 Schedule 19 agreed to.

Clause 90 - Corporate venturing scheme

Question proposed, That the clause stand part of the Bill.

Howard Flight: Our understanding is that the clause and the schedule make technical changes to corporate venturing schemes that are essentially similar to enterprise investment schemes in scope, but apply to companies and corporates. The technical changes are essentially the same as those to EIS and VCT investment parameters, and we welcome the proposals.
 Question put and agreed to. 
 Clause 90 ordered to stand part of the Bill. 
 Schedule 20 agreed to.

Clause 91 - Enterprise management incentives: subsidiaries

Question proposed, That the clause stand part of the Bill.

Howard Flight: Again, our understanding is that the clause amends a technical rule in relation to the definition of a qualifying subsidiary for the purposes of enterprise management incentives. Previously, to be a qualifying company all subsidiaries were required to be 75 per cent. subsidiaries; that requirement is now relaxed to 51 per cent., and there are new tests if the subsidiary is a property management subsidiary, in which case it will be required to be a 90 per cent. subsidiary. During the course of many—I forget how many—Finance Bills, we have consistently made the point that EMIs need to be widened, and we are glad to note that since they were introduced the Government have widened them. The clause is another sensible bit of widening, which we welcome.

Norman Lamb: I welcome you to the Chair, Sir John.
 What assessment has been made of the extent to which the arrangement is used? I understand from the background note that it was introduced in the Finance Act 2000. What is the Treasury's view of how successful it has been since?

John Healey: The hon. Member for Arundel and South Downs is right that in a sense the clause makes technical changes to the qualifying rules for EMIs, but that underplays the fact that we are making the changes in response to representations that we have received to do just that, and that the changes are likely to make EMIs much more useful and attractive.
 To answer the hon. Member for North Norfolk (Norman Lamb): when we introduced EMIs, we estimated that they would be taken up over the first three years by perhaps 2,500 companies; in fact, about 4,500 companies have taken them up and in total more than 70,000 EMI options have been granted. That gives the Committee an indication of how the success of the scheme has outstripped our expectations and how the reforms that we propose in the clause will reinforce it for the future. 
 Question put and agreed to. 
 Clause 91 ordered to stand part of the Bill. 
 Clauses 92 and 93 ordered to stand part of the Bill.

Clause 94 - Permanent establishments and ''25% associates''

Question proposed, That the clause stand part of the Bill.

Andrew Tyrie: It is very nice to see you this afternoon, Sir John.
 There is not a great deal in chapter 6—clauses 92 to 101—and I do not intend to delay the Committee very long. Everybody looks happy about that.

Stephen Pound: We are disappointed.

Andrew Tyrie: There seems to be one person who would like to hear more from me, but perhaps he will make a few interesting interventions.
 The chapter is motivated by the desire to move away from source-based taxation. The idea is that within the EU people should be able to make payments of interest and royalties without withholding tax. That is the intention of the directives that have been going through. As a result, the country with taxing rights would be the recipient country. The UK already has a vast battery of double taxation agreements designed to have just that effect. I do not know how many there are—[Interruption.] I have been informed that there are just over 100. There has also been a lot of work going on at EU level. The EU interest and royalties directive comes on top of the 1992 work on dividends. Along with other directives, it is designed to enable the free flow of interest, royalties and dividends without any application of withholding taxes. We all welcome that, so it is not really an issue. 
 I hope, Sir John, that you will allow me to refer briefly to the chapter in general. It contains some other advantages. A minor one is that some countries with double tax agreements do not supply zero taxation back to the UK. The tax liability remains 10 or 12 per cent., but that will fall to zero once the directive is in force. That benefit will come with implementation of these clauses. 
 The most important thing to consider when dealing with such clauses is whether there is any gold-plating on top of what the directive might in any case apply. Of course, putting a directive on the UK statute book sets the hearts and minds of small groups on both sides of the House racing. I have taken a good look for gold-plating, but apart from a few tiny odds and ends, I cannot find any at all. That is good, because it means we can spend less time on the clauses, but I would like the Economic Secretary to confirm that there is not any gold-plating that I have not spotted. 
 Thank you, Sir John, for your indulgence on those general points. On clause 94 specifically, only firms whose parent has at least a 25 per cent. interest in the subsidiary will take advantage of it. That raises several questions. I got into deep trouble by asking the Economic Secretary seven or eight questions the last time I spoke on a clause. As he felt that that was far too many at one go, I had better get my questions down to about three. 
 The first is a general question. Is the Economic Secretary confident that the clause deals with commercial reality, which often involves chains of companies that own small shares one after another? I am not sure that that has been taken into account, as the clause deals only with the direct subsidiary. 
 Secondly, why is the clause limited to direct holdings when most UK tax law deals with both direct and indirect holdings?

Rob Marris: The hon. Gentleman has slightly confused me. If the clause covered direct and indirect holdings, as he wishes, would not he call that gold-plating?

Andrew Tyrie: That is a completely valid intervention.

Stephen Pound: All that glisters is not gold.

Andrew Tyrie: It may not be. There are two types of gold-plating: gold-plating that may make life much more difficult for UK firms, and the tiny permissible changes that can liberalise a regime. I am suggesting one such approach. Indeed, had I known that this subject would be of such enormous interest to everyone here this afternoon, I would have tabled an amendment. I have one with me but decided not to delay proceedings by tabling it. [Interruption.] The Paymaster General tempts me to do so.
 My suggestion would be of the liberalising variety. The hon. Member for Wolverhampton, South-West can stand up and disagree with me if he thinks I am wrong. It would be genuine gold-plating, not the ''All that glisters is not gold'' type of gold-plating.

Rob Marris: I do not wish to draw the hon. Gentleman into falling foul of the Chairman, but he seems to be proposing two types of gold-plating. I have often heard the expression ''gold-plating'' from Conservative Members when dealing with European laws. Could he delineate a little further the conceptual difference between good and bad gold-plating, specifically in terms of the clause?

Andrew Tyrie: I thought that I had managed to do that.

John Butterfill: Order. The banter about gold-plating is going down like a lead balloon with the
 Chairman. I think that we had better get back to the clause.

Andrew Tyrie: I am grateful for your guidance Sir John.
 If the hon. Gentleman reads what I said a moment ago, he will find a basic, generic definition. I shall now move on quickly before I am ruled out of order. 
 It would be logical to include the phrase ''and indirect'' somewhere in the clause and I would like the Economic Secretary to consider that suggestion. I do not think that there would be any downside whatever—there may be an upside to that appropriate and attractive gold-plating. 
 My third question is a practical one. To get the withholding tax back, someone must obtain an exemption notice from the Inland Revenue and, in practice, it may take months for that to be issued. Can anything be done to speed that up and avoid the long delay? For example, why not permit the exemption to be applied from the moment that the application is made? Someone with an application under a double tax treaty arrangement would be in that position. They would not have to have the exemption certification in their hand. They could make the application and, from that moment, it would be active. There is always a risk that the Inland Revenue would challenge that arrangement and that it would have to be reversed, and in that case they would have to cough up, but they would have to do that anyway under a double taxation arrangement. 
 I should be grateful for an indication of the Economic Secretary's view on those three questions.

John Healey: As the hon. Gentleman says, clause 94 is part of the package of clauses 92 to 101. Together, they implement a European directive into UK law. They provide an exemption from UK tax for companies in other member states when a related company in the UK pays them interest or royalties. When the directive is fully implemented by all member states, it will ensure that tax is levied on those payments only once in the European Union—by the state in which the recipient is resident for tax purposes. That has not been fully achieved through the network of 100-plus bilateral double taxation treaties that we have with other member states.
 The hon. Gentleman raised three particular points. First, he said that he had had a good look for gold-plating and had not found any. At the risk of trying your patience, Sir John, I do not know whether gold-plating will help the Paymaster General with her current tooth problem, but the hon. Gentleman did not find any gold-plating because there is none. The legislation closely and accurately implements the Council directive. It does not go further. To go further would have little practical benefit for UK companies and would have a downside for the Exchequer. It is important to recognise that the changes are useful but modest. The purpose of the clause is to implement the directive. Most of the advantages are already available through double taxation treaties. 
 A general point is the answer to the hon. Gentleman's second question: why are the Government not providing similar benefits when 
 there are indirect relationships? In the first instance, companies can often achieve the same results through bilateral tax treaties, but the directive—this is the important point—is being implemented throughout the Community. Unless all member states implement the directive similarly, the reciprocal effect will be lost, creating more winners and losers among member states. To be frank, the Government would welcome a general widening of the directive's application to more associated companies than are currently within its scope, but there is no advantage to us or to UK companies in acting unilaterally beyond the measures that other member states are putting into place.

Norman Lamb: What is the time scale in which other member states will implement the measures? Are we ahead of the game, or is this happening across the EU at the same time?

John Healey: The hon. Gentleman will be aware that there is an implementation date that applies across the EU. The national legislation and appropriate moves of the 15 states that were members prior to 1 May are proceeding together. Arrangements are being put in place and negotiated for the 10 latest members of the EU. Therefore, the short answer to his question is that the other member states are proceeding pretty much together with us.

Andrew Tyrie: Will the Economic Secretary confirm that it is his view that there will be no benefit whatsoever to business activity—in terms of removing complication and unfairness—by adding the word ''indirectly'' to the clause? He seemed to be saying that adding it would have no effect. I understand his first point—that we are faithfully reproducing the directive and putting it straight on to the statute book. My point was that this might be one of those rare occasions where a benign bit of gold-plating will reduce some unfairness and eliminate some complications.

John Healey: Perhaps I did not make myself clear enough. My main point is that for the benefits of the provisions—modest though they are—to come to UK companies, consistency with the provisions that are being put in place in other member states is important. Unilaterally widening the scope—I understand the hon. Gentleman to be arguing that we should—would be inconsistent with what is happening across the European Union.
 The hon. Gentleman asked about exemption notices. He said, rather loosely, that it can take many months for exemption notices to come through. The directive provides for a period of three months. In many case, the Inland Revenue issues an exemption certificate well within that period. He asks why we do not allow relief when the application is made. The procedure that we have in place, and which will be consistently followed if the Finance Act contains the clauses, is that the Inland Revenue needs to ensure that a non-resident is entitled to relief. There is no other way to collect tax when payment has crossed the border. That is the reason that we have exemption certificates at the moment.

Andrew Tyrie: Why can we not treat those payments in exactly the same way as we treat the existing double taxation agreements?

John Healey: We are treating the payments in the same way as we treat the existing double taxation treaties. We are treating interest payments differently from royalties, as the hon. Gentleman will know. The reason that we have a cautious system for interest payments in place is that the potential flows of those payments are enormous—around £100 billion is at stake in such transactions. Therefore, it is right that we take a cautious approach and have a system of prior approval. That is what the exemption certificates are designed to provide. On that basis, I hope that the Committee will support the clause.
 Question put and agreed to. 
 Clause 94 ordered to stand part of the Bill. 
 Clauses 95 to 101 ordered to stand part of the Bill.

Clause 102 - Introductory

Question proposed, That the clause stand part of the Bill.

Andrew Tyrie: rose—

Chris Bryant: We were doing so well.

Andrew Tyrie: We were doing so well, but a tiny bit must be said about chapter 7. I will do my best to be even quicker on it than I was on chapter 6. There is even less to say about chapter 7, but the whole area is a result of the huge withholding tax debate that took place in the EU. I found it absolutely fascinating and followed it closely. In response to popular demand and if I am provoked, I might develop some of the arguments.
 We have an exchange of information regime to prevent evasion because, quite rightly, we do not want to go down the withholding tax route. We managed to fend off pressure, particularly from Germany, for a withholding tax, and chapter 7 reflects part of a series of agreements to deal with countries that have strict restrictions on disclosure. Those countries, Austria, Belgium and Luxembourg, are not prepared to go down that road and they want a withholding tax anyway, which is consequential upon a citizen of the UK or of any of the other countries having an account in those three countries. 
 We want UK citizens to get a credit on any interest they earn from an account in those countries. Under the clauses in chapter 7, they will be able to do so and get a complete tax exemption if they obtain a certificate. I cannot see any difficulties with the clauses, but it is very important that the Government do what they can to encourage citizens to certify themselves. It is important that people do not pay tax inadvertently, but it is unreasonable and very difficult for the Government to take active and vigorous steps to ensure that. 
 Generally, it is important to ensure that legislation cannot act as a first building block towards the spread 
 of a withholding tax beyond those three countries, and it would be helpful if the Paymaster General confirmed that the determination of the Government, which they eventually showed after some early hesitation, will continue. I wonder whether the battle is over and whether the issue will not return in one form or another. I will make a prediction, which I do not often do, that it will return, and it is important that the Government fight it vigorously. Beyond that, I have no objection to any provisions in chapter 7.

Howard Flight: If any British resident were foolish enough to put money on deposit in Luxembourg and Austria, under the current arrangements, would the British Government get the withholding tax stopped? There are obviously other jurisdictions to which the point applies, but are the arrangements robust enough? They are not much good to us if we do not get the tax into our coffers.

Dawn Primarolo: May I deal with each point briefly? Clauses 102 to 110 are the last provisions necessary for the implementation of the savings directive, which will be considered by ECOFIN to ensure that all measures are in place in all component parts, member states and third countries. Its agreement will trigger the commencement of the directive on 1 January 2005.
 Last year's Finance Bill had the lion's share of the regulations, including provision for the City of London and other providers to know exactly what information they would be required to collect about European citizens, over what period and at what point the regulations would be switched on. 
 It is important to say that the regulations are not active. The preparation has been made but the final switching on comes as soon as we are satisfied, and that is supposed to be this June when the final decision is made that all the measures are in place. 
 The hon. Member for Chichester (Mr. Tyrie) asked a general question about withholding tax versus exchange of information. As he knows through debates on double taxation treaties, the Government's view, and I think the Opposition's view as well, is that exchange of information is the fairest, simplest and best way to ensure that the right of amount of tax is paid by the right person in the right place. All the arrangements ensure that UK citizens pay tax to the UK, or that German citizens pay it, if liable, to Germany. 
 The debate about exchange of information ranges much wider than the European Union, although that is now very large. All accession countries must comply as of 2005, when the directive becomes active. It was part of the key negotiations with those countries. The three countries that the hon. Gentleman named are in a transition to exchange of information from withholding tax, which goes from 15 per cent. for three years, to 20 per cent. for three years and 35 per cent. thereafter, with an ultimate commitment to move to exchange of information. The directive will cover all member states of the European Union. 
 The same debates are being conducted within the Organisation for Economic Co-operation and Development. As the hon. Gentleman knows, the 
 Crown dependencies, overseas territories and Caribbean countries are also committed. They are going initially with a withholding tax, but on the same basis as the three member states. They have made a commitment to move to exchange of information when the three member states do so. 
 The debate is also being taken forward in the G7 on the basis that it is right to ensure that tax is paid in the correct place. Extensive discussions about providing for exchange of information on a much wider basis have taken place with several countries. 
 Withholding tax was first discussed under the previous Government. It was not that they managed to fight it off—it collapsed. This Government started in a minority of one, with 14 favouring a withholding tax, but we have clearly established an international principle in the European Union and elsewhere that exchange of information is the way forward.

Andrew Tyrie: I remember being in a Treasury meeting in about 1989 when we succeeded in fending off withholding tax after a particularly vigorous French attempt to impose it, so the Paymaster General's suggestion that it collapsed—that it was not in any way an effort of the Government of the time—is quite wide of the mark.

Dawn Primarolo: Actually, there was never a vote on the issue, so it was not fended off in that sense. As the hon. Gentleman knows, decisions in ECOFIN are taken on the basis of unanimity, so there is always the veto option and the debate never reached that point. Of course, I am not privy to the papers because the Government then—

Andrew Tyrie: The right hon. Lady will have to take what I said at face value.

Dawn Primarolo: I will certainly take the word of the hon. Gentleman, with just a little pinch of salt. I have heard what our European partners thought at the time. It is also true that that Government did not bring forward an alternative and say, ''Yes, there is a real issue with cross-border transactions of that type, where tax does not go to the relevant authority and most of the transaction is not taxed at all.'' They did not raise the question of banking secrecy, how that needs to be confronted in international forums and how it is not the way forward.
 There have been some heated debates on that in the OECD, which has aimed to encourage those member states that still insist on banking secrecy—the three that the hon. Member for Chichester mentioned—and other countries in the world, that it is time that they moved away from that. It is perfectly possible to maintain confidentiality without condoning tax evasion. 
 With regard to sharing, 75 per cent. of the moneys collected through the withholding tax on British citizens in any of the three member states must be passed to the UK authorities and will be identified in the consolidated fund as a tax receipt. Those payments must be transferred no more than six months after the 
 completion of that member state's tax year. So, assuming that the mechanisms start in 2005, payments will be transferred in 2006, because all the arrangements will be in place, and 25 per cent. remains to cover the requirements of the member state that levies the withholding tax.

Howard Flight: How can that be done? Is it dependent on passports or on disclosure of address? This country will not be involved in that for obvious reasons, but it struck me that it is questionable technically whether we will get our fair cut.

Dawn Primarolo: The member states concerned have to follow the arrangements in the directive that specify exactly when the withholding tax should be applied. It is important to remind everybody that this year's directive applies to individuals and not to corporates.
 The gearing up of the withholding tax from 15 per cent. to 20 per cent. to 35 per cent. means that it will come in at a high rate. UK citizens who suddenly find themselves paying a tax when they were not before, need to decide whether they want to declare it for the purposes of getting the relief, so that they can claim that tax back and have their income counted in the United Kingdom system. 
 I am sure that the hon. Gentleman can imagine—he will know of our discussions with the City of London; it was an extremely good consultation and we worked together well—that, in the process of any agreement, the aim is for the details on collection to be as tight as they can be. In fairness to the three member states concerned, they intend to be bound by the directive and to make provision accordingly. Therefore, I do not think that we need to be concerned. 
 I think that we need to be vigilant on the point that the hon. Member for Chichester made, which is that we need to ensure that we move forward on exchange of information and that there is no sliding back, or any other way in which withholding tax could appear on the horizon. I give him and the Committee a categorical assurance that the Government intend to do precisely that, for all the reasons that we know about: the damage that a withholding tax would do to the City of London, to the financial service industries based in the UK and, in particular, to the eurobond market. I commend the clause to the Committee. 
 Question put and agreed to. 
 Clause 102 ordered to stand part of the Bill.

John Butterfill: It has been put to me that it may be convenient for the Committee to take clauses 103 to 110 en bloc. Is it the wish of the Committee that I do that? [Hon. Members: ''Aye.''] In that case, I shall proceed accordingly.
 Clauses 103 to 110 ordered to stand part of the Bill. 
 Further consideration adjourned.—[Jim Fitzpatrick.] 
 Adjourned accordingly at fourteen minutes to Four o'clock till Tuesday 25 May at half-past Nine o'clock.